Does taking out a mortgage loan save money compared to cash? (15 year fixed, fees)

[unknown00]

I'm not a tax guru. A simple 1 sentence answer is fine. Making up numbers here...

1. Pay 300k cash for a house
2. Take out a 300k 15 year fixed loan at 4%

I know one (if not the only) benefit of taking out a mortgage loan is tax deductions. However, what actually puts more money in my pocket?


a 300k loan at 4% means I pay $12000 in interest over 15 years right?


However, does the take deductions over 15 years actually save me from paying more than $12000 in taxes? Is it worth it to take out a mortgage for any reason instead of paying cash? All I care about is what saves me money

[MrCurmudgeon]

Originally Posted by unknown00

I'm not a tax guru. A simple 1 sentence answer is fine. Making up numbers here...

Then your answer is this: No.

Read on if you want more than a simple one-sentence answer.

1. Pay 300k cash for a house
2. Take out a 300k 15 year fixed loan at 4%

I know one (if not the only) benefit of taking out a mortgage loan is tax deductions. However, what actually puts more money in my pocket?


a 300k loan at 4% means I pay $12000 in interest over 15 years right?

No.

Assuming you pay over the full 15 years, your total interest expense will be just a shade under $100,000.

However, does the take deductions over 15 years actually save me from paying more than $12000 in taxes? Is it worth it to take out a mortgage for any reason instead of paying cash? All I care about is what saves me money

The mortgage interest deduction may reduce your taxable income, resulting in a tax savings. (I say may because it depends on your other deductible expenses, income level, yada yada yada). But you're still paying interest.

The real question here is what you would do with the money while paying off the mortgage. If you invest it, provided your after-tax yield exceeds your after-tax net interest expense, you come out ahead. Then there's also the issue of liquidity.

[ncole1]

Originally Posted by unknown00

I'm not a tax guru. A simple 1 sentence answer is fine. Making up numbers here...

1. Pay 300k cash for a house
2. Take out a 300k 15 year fixed loan at 4%

I know one (if not the only) benefit of taking out a mortgage loan is tax deductions. However, what actually puts more money in my pocket?


a 300k loan at 4% means I pay $12000 in interest over 15 years right?


However, does the take deductions over 15 years actually save me from paying more than $12000 in taxes? Is it worth it to take out a mortgage for any reason instead of paying cash? All I care about is what saves me money

If you get a mortgage, what would you do with the money that you didn't use to pay cash?

This is what it really comes down to - and without knowing this, it's impossible to answer that question.

[SmartMoney]

Your answers have been dead on, even though you never got the answer you sought.

Your best bet is to sit down with a financial planner (one that is not compensated on commission) and construct a plan.

[luv4horses]

MrC is exactly right. You would pay 100K in interest over the 15 yrs with zero down. With 20% down you would pay 80K in interest. http://www.bankrate.com/calculators/...ion-calculator

Borrowing 240K, the first month your interest is $800. If you are in the 20% bracket you will get back $160 for that month essentially. By the time you are in the 60th month your interest is $580 so you get back $116, and so on--less and less as time goes on. Meanwhile you have that 240K tied up. I did not calculate this, but let's say your total mortgage deduction gets you 20K over the 15 yrs.

If you invested 240K for a return of 3% in 15 yrs you would have $376000 (compounded monthly) or with a return of 4% you'd end up with $436,000.

The thinking here is that (without taking any thing else into consideration) paying 300K up front you could save you $80K + 20K = 100K. Investing with 3% return could yield $76K and would not compensate for the 100K savings. In a better year with a return of 4% you'd earn $136K. So your crude break even point would be at between 3 and 4% return on investment (IF there were no investment fees!). If you invest well and wisely you might make more money in the long run by having a mortgage, but investing IS a risk.

But it is more complicated that that, actually, because you might want to assume you would steadily take your property payments out of the "240K pot" of investment money. This would steadily deplete that 240K you were investing, so you would never earn that lovely net of $136K - 100K = 36K. I don't have the means to calculate this but it would have a significant effect and maybe even wipe out that 36K.